A reverse mortgage is a wonderful option for your retirement. It allows an opportunity to retire in comfort for those who would not otherwise be able to do so. Essentially, a reverse mortgage loan allows a senior homeowner to borrow money and use the home’s equity as backing. If you’re interested in such a great opportunity, but have some doubts, use this collection of answers to frequently asked questions to help you make the right decision when it comes to your retirement.
Q: Are reverse mortgages any different today?
A: Yes! Much different. In fact we refer to it as the “New Reverse Mortgage”! Due to highly regulated state and federal laws, reverse mortgages are considered safer than ever before. You still retain the title of the home, the lender does not gradually take over your home through equity share, and any fees and costs are federally regulated.
Q: How does a reverse mortgage compare to a conventional mortgage?
A: A conventional mortgage requires you to make monthly payments to the bank, paying off your loan over time. A reverse mortgage allows you to receive cash from your lender in a manner you choose, and as long as you live in your home, you won’t have to make a single payment on your loan.
Q: How is the amount and length of the loan determined?
A: You have some say in the length of your loan based on the disbursement option you choose. The amount is based on the value of your home. A loan officer will work with you to help you determine which choice is best for you.
Q: How will I receive the proceeds?
A: You have the option of receiving the proceeds of your reverse mortgage through a few different options:
- Lump sum cash at closing
- Line of credit
- Monthly cash proceeds for life
- Or a combination of all three
Q: Does the lender take the title of my property?
A: No, you remain the owner of the home and keep the title in your possession. Your home is simply used as equity, so the lender will place a lien on the property, which is paid off when you sell your home or pass the property to your heirs who can pay off the loan with another one.
Q: I currently hold the title of my property in a trust. Can I keep it that way?
A: Yes! We can still keep the home in a trust and get a reverse mortgage.
Q: How are interest and other fees calculated?
A: Generally, any fees and interest use a fixed or variable rate with a margin and an index. Your exact fees will depend on your situation, and a reverse mortgage professional can tell you exactly what they will be.
Q: When must I begin making payments on my reverse loan mortgage?
A: Though you will have to continue paying for some things, (see following question), your loan will not become due until it reaches what is called a maturity event, which occur if the borrower:
- Sells or transfers the home
- Fails to pay home owner’s tax and insurance
- Passes away
- Leaves the home permanently or for 12 months or more
- Fails to meet the terms of the reverse mortgage
Q: What are my obligations with a reverse mortgage?
A: Though you will not have to make payments on your mortgage, you still retain the title of your home. You must continue to pay for your home insurance, property taxes, and basic home maintenance. Failing to do so will put you at risk of losing your reverse mortgage. If the property taxes and insurance are not made on your home, the lender will notify you of foreclosure. It it very important to remember that even though you don’t have to make monthly mortgage payments any longer, the taxes and insurance is still required to be paid. And if they become delinquent, you run the risk of having the home foreclosed upon. We highly recommend when planning for the New Reverse Mortgage that you plan out with your consultant a reserve amount or a reminder to keep current on those items.
Q: Will any of my government benefits (i.e. Social Security, Medicare, etc.) be affected?
A: A reverse mortgage is not considered income, so your government aid will not be affected.
Q: How will my loan affect the heirs of my estate?
A: Your loan can affect the heirs of your estate in the following ways:
- If your home gains value, your equity increases and there are more funds left over for your heirs.
- If you pass away before your loan is due, the remainder of your loan will become a part of your estate, and your heirs are given a certain amount of time (usually 12 months) to sell the home or else keep the home and begin paying off the mortgage loan.
- If the amount of the loan exceeds the value of your home, the Federal Housing Administration (FHA) will cover the difference. However, if your heirs choose to keep the home, they must pay off the loan in full.
Q: Will my heirs still receive an inheritance?
A: After the balance of your reverse mortgage is paid off, all remaining equity goes to your heirs. We will provide an amortization schedule upon closing so that you will always know what your current loan balance is. The amount of remaining equity will depend on how much money you draw, how long you stay in your home, home appreciation, your home expenses, and interest rates.
Q: Are there limits to what I can use spend my reverse mortgage funds on?
A: No. Your funds can be used for anything, including paying off your existing mortgage, debts, and home repairs. You can also use your funds to help family members and to travel. We do recommend that you talk with a qualified financial advisor regarding using your proceeds wisely and the effects of your loan on other benefits.
Q: Does my home have to be worth a certain amount to qualify for a reverse mortgage?
A: Yes and no. This question doesn’t have so much to do with the value as the size and circumstances of the home. For example, mobile homes are not generally eligible for a reverse mortgage, though there are some exceptions. If you own a manufactured home, HUD provides these guidelines for taking out a reverse loan on manufactured homes:
- 400 square feet minimum
- Built June 15, 1976 or later
- Classified as real estate (meaning it is taxed and has a permanent foundation)
- Built on a permanent chassis
- Mortgage is all encompassing and is no longer than 30 years from the amortization date
- At or about 100 year flood elevation
If you have any questions about whether or not your home qualifies for a reverse mortgage loan, contact us today.
Q: What is a Government-Insured HECM program?
A: HCEM stands for Home Equity Conversion Mortgage. This program allows the government to fund and guarantee reverse mortgages, ensuring that you have a safe and secure way to access your reverse mortgage without making a mortgage payment. To clarify government-insured to remove any confusion, the Consumer Financial Protection Bureau requires this explantion to help in understanding this language; “Borrowers will continue to receive their authorized loan funds if their lender experiences financial difficulty or if their loan balance exceeds the value of their home. If the loan balance exceeds the value of the home, FHA may cover this difference for the lender when the loan is repaid’ and not that the government will stop the home from being foreclosed on or that it will take any other protective measures for the borrower.”.
Q: If, in the future, the loan exceeds the value of the home, what happens?
A: Nothing. Thanks for the HECM program, your reverse mortgage continues. You have no responsibility for that balance. And if the balance decreases, the lower balance or the appraised value is what heirs or family will have the choice of using.
Q: Is the program “safe” for senior homeowners?
A: Yes. You will not have to make a single payment on your reverse mortgage, and it is not dependent on the economy, the money you withdraw, or how long you live in your home. Through the HECM program, you also have access to the money in your home no matter what happens to your lender or your home’s value.
